When Do States Tell Feds to Piss Off?

I was reading an article this evening about the fact that the Governors of several states getting together to ask the federal government for help financially, even if it means that we increase the national debt to do so. It got me thinking about how we have gotten to this point, and consequently what should the federal government be required to do because of it. And make no mistake, there is no single right answer, because the situation varies from state to state. It causes me to ask a few distinct questions around state and federal relationships. First, at what point should states be telling the federal government to piss off in terms of required social programs or costly legislation? At what point should the federal government be returning the favor for states that do not hold themselves fiscally responsible? And finally, when is the point that some states should be withholding help to the federal government that is passed on to states that acted fiscally irresponsible? I will explain all of these questions a little further below. But the fact is that we have found ourselves in a situation where it seems like the vast majority of states lack the ability to fiscally sustain themselves, some through reckless spending and others through forced spending from the federal government mandates.

We saw some limited coverage of the state arguments against the stimulus when it was passed last year. I recall some states claiming that they would refuse federal stimulus money because of the strings attached that would later make them fiscally troubled. Texas is the state that pops into my head, as they were one of the initial states who refused federal money because of the future burden that would come with the programs that federal money demanded, but didn’t fund later on down the road.

High on the list of unfunded demands are extended unemployment benefits. The federal stimulus helped to extend the money available to states for payment of unemployment benefits. The catch was that the federal government also extended the length of time eligible for those unemployment benefits, meaning that many states who took the money for a short term fix are now facing a mid term crisis. The law entitles folks to benefits that the states simply do not have the money to pay. Another big expenditure that the federal government expanded is Medicare. The states simply do not have the money to continue paying for this service despite the promises of the federal government that the services would continue.

One of the most laughable things that I have been hearing over the last couple of months as we approached the end of fiscal years and states worked to pass budgets was the following sentiment: What we are facing is not a spending problem. It is a revenue problem. It isn’t that government is spending too much money or promising too many entitlements. The problem is simply that there isn’t enough money being funneled to government from the people. Not enough tax money coming in is the issue. And this is because people aren’t working, aren’t spending money on consumer goods, and aren’t buying houses. Even in the face of reality, government is unwilling to admit that they spend too much money. The problem isn’t the gross overspending that government does, the problem is that the people aren’t doing their part and contributing enough money to be redistributed by the government! What absolute horse droppings.

And this was BEFORE Health Care!

Before I continue, allow me this one little sidebar. THIS is the exact problem that a progressive/socialist/communist society always, ALWAYS will run into. When you continually increase the scope of what government provides, when you continually redistribute the limited revenue being earned, you eventually reach a point where there simply isn’t any more money to take away. What we are seeing today is the inevitable result of a “greater good / entitlement” society. Eventually what you promise to provide becomes greater than the revenue coming in. You begin running in the red. Our country has ignored this reality for so long now that we have virtually no ability to rebound and ever see the black again without a massive decrease in social programs and entitlement spending. Sidebar complete.

Currently what we have is a government that is very much in the red. More in the red than ever before in history. That is the major story line in the economy. The fact that the national debt is so far beyond recoverable that it is literally beyond the comprehension of many Americans is a known fact. What is not nearly as evident to many is that many states are in the exact same boat. In fact, according to the Center on Budget and Policy Priorities, 48 of the 50 states this year addressed or are facing budget shortfalls. A quick look at the top ten, according to them:

California: $53.7 billion shortfall or 58 percent of its budget

New York: $17.9 billion or 32 percent of its budget

Illinois: $9.2 billion or 33 percent of its budget

New Jersey: $8.8 billion or 30 percent of its budget

Oregon: $4.2 billion or 29 percent of its budget

Connecticut: $4.1 billion or 23 percent of its budget

Arizona: $4 billion shortfall or 41 percent of its budget

Washington: $3.6 billion or 23 percent of its budget

Alaska: $1.35 billion shortfall or 30 percent of its budget

Nevada: $1.2 billion or 38 percent of its budget

Vermont: $278 million or 25 percent of its budget

I should note that nearly all of the states listed in that top ten (listed here in order of amount short, although the top ten was listed in the article by percent of its budget, so there may be some states with larger deficits, but less than the 23% that was the lowest in this top ten) are states that lean heavily Democratic and have very liberal state governments. Off the top of my head, only Alaska and Arizona are conservative states. Whether their is a causal relationship to this, I won’t speculate. I don’t have time to really study it this evening. However, it should not be shocking that states with the highest entitlement mentality, such as California, NY, Washington, Oregon, and Vermont are all in the top ten.

The first of the three questions I asked above that I will address is the forced entitlements that the federal government sends down to the states. Things such as increased unemployment benefits are high on this list. Remember that when the federal government does things such as increase the unemployment eligibility terms, it often eventually falls to the states to fulfill the promises that the showboating assholes in DC promised. The federal legislation will usually cover a year or two and then hand it off to the states and tell them to figure out how to continue the handouts that the feds promised. The stimulus bill last year was a prime example of this, and we actually saw some states balking at taking the federal money because they knew the hardships that would come later. Many fiscal hawks wrote lengthy articles as the stimulus was debated noting the plethora of federal mandates that had longer periods to expiration than funds allocated to pay for them. The message to the states: You have a couple years to find a way to pay for what we promised.

Isn’t there a point where states should be able to push back and say, “we are only covering what you have provided the money to cover”? The states are forced to accept this horrible deal with the threat of receiving no money now unless they promise to provide the funding for these enhanced services later. The long term effect is increased entitlements for the population and the corresponding increased STATE taxes that fly under the radar in national elections. Representatives in DC claim to have no say in state fiscal matters, yet it is their federal legislation that forces increased state spending in many cases. Shouldn’t this be a situation where the state simply says that they can’t afford it, so the promises that the feds gave are meaningless and will not be fulfilled unless the federal government wants to step forward and pay for them? I say yes. The states should have that right.

Question two goes the opposite way. Let’s take the state of California as an example. California goes over the top in terms of liberal spending policies. They offer increased entitlements and take political positions (on immigration for example) that result in massive expenditures that other states that are more fiscally responsible simply don’t have. Look at that number for California above. Nearly $54 BILLION in shortfall for their budget. The amount that they are short is several times higher than the entire state budget for the majority of states in America. I know they have the highest population, but Texas is number two, and they are not on the list (37 million people versus 25 million). California has a long and storied history of reckless state spending on many things, with entitlements at the top of the list.

Should the federal government continue to give money to states such as California and New York that utterly fail to get their spending under control and assess whether they are reckless? Let’s take another stimulus example of where the federal government gives money to prop up reckless spending: Medicaid spending by states. For example, New York spends nearly 73% more per enrollee than the national average, and rather than be forced to fix that gap, the stimulus provided a stop-gap help in continuing that spending. In my opinion, what should have been done is that the federal government simply said, “No more federal money for you until you get spending down below the national average per enrollee.” The state would then be forced to look at ways to reduce spending overall in all areas in order to get spending down while they worked on a fix for medicaid expenditures. Force the states to do some tough budgeting and find out what is really important. Eliminate the massive entitlement spending and fall back to what is required and nothing more.

Finally, why should states that effectively work to limit their spending be forced to contribute money to states where they are reckless and fiscally irresponsible? You may recall earlier that I noted that 48 states fell into the bad category. The two states that did not have fiscal problems were Montana and North Dakota. Two of the least populated states, for sure. But they have managed their spending to ensure that they come up with a budget that is BELOW their income. You know, that crazy thing that most Americans are forced to do with their household budgets. Why should those two states continue to be penalized because the other 48 states cannot seem to find any fiscal responsibility? Furthermore, shouldn’t states that manage to run in the black instead of in the red have the fundamental right to tell the federal government to screw off when they say something about fiscal policy. I know I wouldn’t take economic advice from a neighbor that I watched constantly operating in the red. Why should they?

So there are my questions for everyone to discuss. What is the point where states begin to tell the federal government to go to hell with their mandates and requirements that further strain state budgets? What is the point where the federal government tells states begging for fiscal help to go to hell until they get their spending habits under control? And who has the right to tell Montana and North Dakota a damn thing when they seem to be the only governments that have enough fiscal sense to not spend more than they make? The bigger question above all of this: When are we going to realize that we simply cannot bankroll this progressive agenda that the far left keeps telling us is the utopia that we are all “entitled” to?

Comments

Where you find a coincidence that nearly all of the top ten states facing budget shortfalls are progressive states, I see a very different phenomenon going on here. I see that more than 50% of those top ten states (NJ, CT, NV, IL, CA, NY) are all in the top ten states receiving the least federal spending per dollar of federal taxes paid. Even more amusing, two states on the top ten list for receiving the most per dollar spent? You guessed it: North Dakota ($2.03) and Montana ($1.64).

What I see is the blue states with less federal funding are those with very rich people who somehow manage to NOT pay their fare share of the tax burden. Avg income in the blue states is larger.

The red states are the poorer states and their avg. income is lower. If you gave back the same dollars per capita the Red states would look like they got more per dollar of tax paid.

And all of this while true has little to do with the actual reasons for the numbers your article presents.

To compare apples to apples one must eliminate all Federal expenditure for federal govt employees and programs involving federal property. Such as National Forests, Parks and military bases. You will find that in Montana and N. Dakota, as well as other Rocky Mtn states that the federal presence dwarfs the private sector economy.

And I am guessing the only reason Montana and N. Dakota have balanced budgets at the moment is the revenue for OIL/COAL.

Oh, and Montana used 800 million in Stimulus to reach its “balanced” budget this last cycle. You can hear the stampede of chickens headed our way in the distance.

My only point is that it is foolish to ‘blame’ the problem of being in the red solely on a state’s progressive expenditure programs and a supposed entitlement mentality. While these can be clear contributing factors as many of these programs do need to be scaled back and focused to provide for those who truly need it, this is not to sole reason for budget shortfalls in these states.

Actually it is the major reason for their shortfalls. There are other contributing factors but the size of the State programs is the major reason they have deficits when income slips or demand for those programs increases.

The federal tax money returned per dollar taken is not relevant to the issue of State Budgets.

Interesting information, thanks for adding it to the discussion. I am unsure how relevant this is to the results we are speaking about. JAC seems to believe that there is no relevance. I am not sure, myself.

When in Nevada recently I visited with friends in State govt about the large deficits.

The State has cut spending so much it is on the verge of losing many of its Govt agencies or at least their ability to meet their mission.

Their stated reasons for the massive deficits and why they can’t get ahead of them.

1. Unemployment drives up the cost of the entitlement programs faster than they can cover with increased taxes and budget cuts.

2. Reliance on gambling and sales taxes. These are among the first to take a serious reduction during a hard recession cycle. Generally there was a feeling that they put all the eggs in one basket.

Now, play this situation into the election campaign of Harry Reid and what do you get? “AS SENATE MAJORITY LEADER I WILL BRING HOME THE BACON, so vote for me. My opponent can not deliver the Cookies that I can deliver.”

Now when the population is desperate, do you think they will vote against the guy who they know can “bring home the bacon” and vote for his opponent who is talking about the need to reduce Federal spending?

We will soon see just how much courage the citizens of Nevada have. I can tell you that there was a day when they would have booted his sorry ass out and taken the consequences. I am not so sure that spirit still prevails.

Agreed that the proper role of government is a major topic. I have been working on an article on that very subject that will be published this coming Sunday night/Monday morning. I think the proper role of government is going to make for interesting discussion.

@USW – thought provoking on a Monday – I had to go get more coffee to stimulate some more nerve endings.

I would not encourage all out State v. Federal “war” – I think what you speak of is the need for a larger state to show some leadership and draw a line in the concrete. Elected “leaders” sometimes need to fall on the sword / die on the hill – risk not getting re-elected to do the right thing in fiscal responsibility. There is a breaking point – even the most liberal-minded of folk must recognize this. Pervasive and sustained entitlement is wrong on any and all levels. My mantra has always been and always will be very limited (in time) but very focused and results focused social programs/assistance. Put the money back in the State coffers – the more local the pain the more likely we are to do something about it.

Eliminate the Dept of Education
Eliminate the Dept of Labor
Housing and Urban Development? See ya
Veteran’s Affairs? Bye Bye
Energy? No thanks
Defense? Cutting you in half
Interior? Nope – don’t need you either

I could go on and on and on – but for me, so much is wasted on big bureaucracy with little to show in progress and effort. Now I realize there may be some essential services provided w/in some of these Departments and other agencies that really have outlived their usefulness (and in many cases their budgets), but put this stuff and decisions closer to the people – make it more local.

Maybe we should require, as a performance evaluation, our elected crooks to reduce the Federal budget by x% every year or…….or they get thrown from office…….or they get thrown in jail……..there is no pain to be felt by those who control the money, and that will leave us perpetually in a financial pickle.

Good morning and good question JAC – my first reaction to that is they become State lands – calling them Fed lands means they need Fed money and therefore control. To promote mindshare and learning from one another we establish a voluntary committee or forum so the different States can collaborate on land management issues, conservation, etc. – it would have to be non-binding I would think – but there would need to be some mechanism to handle disputes or conflicts. I’d like to keep thinking through this but am curious also what you’d recommend?

This is one of the most interesting questions I have studied. As you know I was in the middle of the latest efforts to put the States in charge. There have been several ideas floated over the years and I think there are positives to be drawn from many.

One is for the States to take the land with certain restrictions placed on the land by the Feds. Such as they can’t sell it into private ownership without replacing acre for acre.

Another was to establish Land Trusts with the wildlife and school kids as the beneficiaries. The lands would be managed by Trustees consisting of State agency and private sector people.

Yet another would be for the Feds to turn over management and simply give the States the money to cover the costs.

There are actually many interstate groups that collaborate in the west and that currently deal with “inter-state” environmental issues. In fact, some of these groups are international as Canada is our neighbor and the ecosystems are shared.

Perhaps an article dedicated to this topic might make for an interesting change of pace this summer. And of course, we can’t address this without throwing the “Indian Reservations and Treaty Rights” into the mix. Some Treaty Rights apply to federal but not state lands and others apply to all lands.

Then of course there is the federal hydro-electric system.

But I will admit that my simple solution, when I want to ignore all the complexity, is to simply turn it all over to the State’s with some caveat on how it can be used or disposed of. I do believe that most citizens today would not want to see those lands over exploited or subdivided and would work hard to make sure the State govt didn’t do so.

I think every state should stand on it’s own, except on defense. Our nation was intended as an experiment. Every person, family and state has the right to succeed or fail. Entitlement states would attract the deadbeats. States that require welfare recipients to limited support, a pathway to self-sufficiency, would drive out those unwilling to support themselves. Eventually, we would end up with the best model for our system of government. Continued federal interference insures failure.

California is the best modern example of what works, and what does not.
Contrast their Golden Age with today.

California based its ascendancy on two seemingly contradictory principles: entrepreneurship and activist government. Under Gov. Earl Warren, but also Goodwin Knight and finally Pat Brown, the state made a commitment both to basic infrastructure—energy, water, roads, schools, parks—and expanding its economy.

By the early 1960s, this system was hitting on all cylinders. New roads, power plants and water systems opened lands for development for farms, subdivisions, factories. Ever expanding and improving schools produced a work force capable of performing higher-end tasks, and capable of earning higher wages. New parks preserved at least some of the landscape, and gave families a place to recreate.

I want to speak up here about what’s going on here in Reno and what we’re experiencing. The job market does suck here right now, and sitting at 14% unemployment isn’t helping matters any either. I have been looking for a job now since I got laid off last October, and I have come to the conclusion the reason I can’t find one or get one, is I have my age against me. Who is going to hire someone that’s almost 60 years old, thinking, yeah, sure, and just how long do you plan on working, maybe another 2, 3 years at most before retiring. Why should I hire you, when I can get a younger person who will be around longer than you. I can’t even get a job at Walmart as a door greeter, and believe me, I have applied. I have applied at so many places where I think I am qualified, only to be told, that position has been filled. So, what do you so, keep trying and hope that somebody out there will hire an older person who does not take time off and is willing to work any hours, doing anything.

There are a lot of places that have closed up because people are just not doing the things they used to do because of the lack of money. No job, being foreclosed on, banks refusing to loan, higher prices, which means, people cannot afford to be able do anything anymore. Harry Reid hasn’t done didly squat for this state for a long time, and yes, we want him out and looking forward to November. People that I have talked with here are not happy with him and they all say and think the same way. He has turned his back on the people of Nevada and unless he changes, like that will ever happen, then we’re praying that come November, he’s gone.

The only revenue we get here, is when we have special things going on that bring the people here to Reno, like the Rodeo, Hot August Nights, which now we might have lost to Long Beach Calif, the Air Races, Bowling tournaments, Volley ball, and basket ball tournaments, Street Vibrations. Downtown looks like a garbage pit, casinos have closed up for the most part, except for Circus Circus Silver Legacy, and Harrah’s, and that’s about the only ones left down there, all other have closed up.

We have had several layoffs, from the police department, fire department, which about 3 or 4 have shut down, city workers have been cut, teachers have been let go, closed several departments at the university here, professors have been let go, and all for budget cuts to try and help the city, which hasn’t yet.

So, yeah, the economy has hit Reno pretty bad. Thousands of people are looking for jobs, and I mean people who are very well qualified, but can’t get jobs, even recent college graduates can’t find work here. So, until things turn around, it’s not going to improve any time soon here.

Glad to see that the debates continue to rage on during my brief departure from the world of computers.

I seem to look at all Government, Fed, State and local, as being all the same. With exceptions, most are corrupt and fail to do the jobs that they are intended to do. Crime is rampant in many cities, roads and infratructure are in poor condition and need updated, but it’s more important to pay Govt workers considerably higher wages than that of the public sector and to pad the pockets of politicians. It’s at all levels. Laws are outdated and many should be repealed. The States should say “no” to the Feds when they exceed their Constitutional authority, but have failed to keep Feds in check, and the results have yet to be played out.

It is time for the states to begin asserting their rights and authority. They need to say no to both spending requirements and money, and they need to never ask for federal help. I am betting that the first state to stand their ground to the point of filing for cescession will see their revenue and population explode. I know I would move there.

This has been discussed for quite some time now. I will be fully relocted in the mountains next week :) Finished the set up, power, lights and wood burner in the new pole barn this past 11 days. The garden is growing well, at 75′ x 26′ it should produce well again this year. Looking at canning about 40 cases (480 quarts) of veggies and venison. the new owner of the farm next us is going to allow us to help with crop damage by sharing some of his damage tags (10 to 15 per year).

Also started our 4th batch of homemade brandy, which yields about 15 fifths each batch, and will do two batches a month until we have our ten cases of bottles filled (good stuff I might add).

My daughter is visiting, so I’ve been absent a bit. quick question, will this announcement by BB cause gold to start going back up soon? Its been heading down. I’ve heard talk of deflation and that gold might get as low as the 800-900 dollar range…..

I’ve been reading that we are currently experiencing both inflation and deflation; inflation in consumables like food, and deflation in debt based assets like houses and cars. I believe the markets are heavily manipulated, especially gold. When I saw the 800-900 figure I thought it would be too good to be true, and have planned to do as you suggest, buy the odd coins when the price is down a little and smile when it isn’t.

…which is why I insist a study of the definition of the concepts of inflation/deflation.

The price of goods does NOT determine inflation or deflation; in this, this is the most important concept.

Prices increases due to inflation are a consequence not a cause.

Price decrease due to deflation is a consequence not a cause.

For example, the price of computers going down is NOT deflation and the price of gasoline going up in summer is NOT inflation.

Inflation is an increase in the money supply.

Deflation is a decrease in the money supply.

An increase in the amount of money in an economy causes fewer goods to be traded for the same money – and since all things are priced in terms of money this manifests in a systemic increase in prices over all goods.

Deflation means there is less money in the economy, making the trade for goods with money gets more goods – which because all goods are priced in terms of money, creates a systemic lowering of prices.

The drop in prices of houses is not deflation – it is an over-supply of houses in a market.

The rise in prices of food IS inflation – the food supply has not changed substantially – yet the price has gone up.

Given that the States have used nullification in the past
(Fugitive Slave Law), I’d argue it is.

(Counter-argue: it hasn’t been used since after the Civil War – which, for many, solidified indisputably the primacy of the Federals)

(2) As you pointed out, most of the State money problems are due to Federal demands.

(3) No, but Nullification does not depend on Federal Court!

You don’t go to the Fed. Court to claim that the Fed. Court’s rules don’t count…. you have to go to a State Court, and have them state that “…this is a Federal Matter…” – if they say that, then you go to the Fed. Court, but nullification exists in many (Most) State Constitutions and therefore are a State Court issue.

“…states’ rights is a constitutional, not political, issue, and the idea of a balance of power between the federal and state governments is neither conservative nor liberal at heart. It pertains to the theoretical process and function of government, not to the substantive, individual acts of governance themselves.”

Indeed, it’s quite worth noting how some of the worst tyrants in history felt about states’ rights and nullification. Adolf Hitler’s thoughts on them were as follows:

“National Socialism must claim the right to impose its principles on the whole German nation, without regard to what were hitherto the confines of federal states… The National Socialist doctrine is not handmaid to the political interests of the single federal states. One day it must become teacher to the whole German nation. It must determine the life of the whole people and shape that life anew. For this reason we must imperatively demand the right to overstep boundaries that have been traced by a political development which we repudiate.”

That may be a cheap shot, but still, nullification, aside by being used to defend runaway slaves and free speech, has been used to stop military conscription, tariffs and unlawful search and seizures. I would say those are civil rights-friendly policies. The nullification threats over conscription during the War of 1812 are very reminiscent of the civil disobedience over the military draft during the Vietnam War. And in both cases, they were effective. The federal government was unsuccessful in creating a draft for the War of 1812 and the draft was eventually abolished after furious protest and defiance in 1972.

Today, nullification is being used, in everything but name, on a whole host of matters from conservative issues such as gun rights, to liberal issues such as medical marijuana (California, effectively nullified the federal ban on it). Many states are considering challenging the porkfest of corporate welfare that is healthcare reform. The Real I.D. Act, which created a national ID card, was passed, but so many states have refused to implement it that the federal government has, at least for now, given up on it. There is quite a lot of nullification going on right now even as we debate whether or not it’s constitutional, racist or seditious.

I read this morning, that the Obama administration were given a 16% pay raise, and that there will be no raise in social security. Sure, the ones who need it, don’t get it, and the ones who make more than enough, get it.

Sounds like here. They’ve made all these cuts to try and help the budget, made all those cuts at the university, but yet, they’re talking about raising the tuition by 10%. So, I’m guessing, that those who can just barely afford it now, will either have to quit, or go find yet another job to help them pay for it. As it is now, some of them are already working 2 to 3 jobs as it is just to try and stay afloat.

And, another things here for what I read. Instead of giving the city manager’s job to a Nevadan, who might just qualify for the job, they go outside the state to bring one in, and for about at the same pay grade the last one made, which was about $450,000 a year. I’m sorry, but nobody is worth that amount of money when the city or state can’t afford to pay their own people.

Good Lord!! It’s a “…revenue problem.” Yes, this is the problem. The states are in trouble & need to get themselves out of trouble without the USG. While I still see the USG at the base of most all of these problems, the states must stop asking the USG for continual if they want more independence.

I migh suggest that you read a great book out about a small town that gets too much USG in their lives & takes a stand. It’s a great read & shows the same problems (high taxes, corrupt govt., foreign invasion, continual foreign wars) that were there before. I recommend it.http://www.booksbyoliver.com

In its 2010 annual report, the Bank of International Settlements said that “gold, which the bank held in connection with gold swap operations, under which the bank exchanges currencies for physical gold,” stands at 8,160.1 million in special drawing rights, equivalent to 346 tonnes this year, up from nil in 2009.” Apparently this amount has now climbed to 382 tonnes since the report was issued.

Swaps – What are they and who does them?

Swaps are financial instruments that allow for the exchange of one asset for another, in this case, gold for currency. They are not gold leasing, futures or options [which the 1999 and 2004 Central Bank Gold Agreement states would not be increased – The 2009 did not contain the statement]. Swaps could be undertaken by the signatories of the CBGA. as these were not included in any of the three Agreements.

Gold swaps are usually undertaken between central banks: One central bank exchanges foreign exchange deposits (or other reserve assets) for gold with an agreement that the transaction be unwound at an agreed future date, at an agreed price.

The monetary authority acquiring the foreign exchange will pay interest on the foreign exchange received, the rate of which is currently very low. Gold swaps are usually undertaken when the cash-taking central bank may want foreign exchange but does not wish to sell outright its gold holdings.

The Wall Street Journal informs us that the B.I.S. did these swaps with commercial banks. We know of no commercial bank that has 382 tonnes of gold on their books. It is likely then that should these commercial banks have been in the deal, they would have been acting for a central bank [or several over time] who wished to remain anonymous.

The B.I.S. received the gold into its safekeeping for the nation that required the foreign exchange for the swap period. Swaps of this nature are renewable once the time runs out, so it is impossible to say how long the swap will last for. The central bank that undertook the swap would have to be certain that it could return the currencies to get the gold back at some point in the future. If that country defaulted, then and only then could the B.I.S. go ahead and sell this gold. Any sale in the open market would be trumpeted loudly to all as well as reported in the Press or by the World Gold Council, B.I.S. or I.M.F.

Why use gold and not currency?

The financial crisis has led to a decline in the number of credit-worthy counterparties and a reduction in credit lines these counterparties can offer. This is significant in a world where credit risk and debt problems have been the subject of banker’s fears since the appearance of the Greek debt crisis. For someone in the trouble Greece is, gold swaps allow a central bank’s reserves to be lent in a credit-secure fashion. In other words, a gold swap allows the lender of currency to benefit from greatly reduced credit risk, as the gold can be held in an allocated account, usually at the Bank of England. The currency deposit is secured with gold throughout the life of the deposit.

Any country such as Ireland, Portugal, Spain, Italy, the U.K. and the U.S.A. can follow this route. Yes, sales may not be permitted for fiscal reasons under Eurosystem rules, but these are not sales, but swaps. So, of the utmost importance is just who swapped this gold? Could it be one of the countries we just mentioned? If so, their situation is far graver than previously thought. The implication is that the collateral they offered just wasn’t good enough, so they had to use their gold. This is major news for the monetary system.

The Significance of the Transaction[s]

What is significant about this or these transactions is that gold is being used in international settlements after so many decades of being sidelined in the monetary system! The transaction itself confirms that gold is being used in this manner, which is a dynamic confirmation of gold’s return to the monetary system. A “Swap” might be the first desperate step in such a transaction with the swapping bank hoping to repay the foreign exchange, but should it fail, the B.I.S . would have to decide either to keep the gold on its books or to sell it. Again, keeping it on its books is part confirmation that gold is active again on the monetary system, a big boost by itself!

Gold is back and alive in the monetary system!

What appears to have really happened is that one nation or more needed foreign exchange to counter some shortfall in its accounts and raised these funds as a short-term liquidity measure, believing that it would be able to return the currency and receive its gold back. The gold would then be returned at the conclusion of the swap period in return for the currencies swapped. If it fails to return these funds to the BIS, then the BIS could discreetly place the gold with another central bank, should it not want to keep the gold. If it did so, the BIS would simply report its disposal of the gold, the originating central bank would report the drop in its gold reserves and the gold buying bank would report its increase in the reserves.

This puts the transaction into an entirely different category. It seems that one or more of the developed world’s central bank’s credit is not good enough for other governmental institutions. If word got out as to which this country is, then the financial markets would go into quite a spin, shaking the global financial system to its core. No wonder the B.I.S. is keeping such a low profile!

Julian Phillips is a long-term analyst of the gold and silver markets and is the principal contributor to Global Watch – Gold Forecaster.

First question-the states should have told the Fed to stick it many, many years ago. As far as the second question-economically for the country as a whole what would the effect be if several states were allowed to go bankrupt??

Good evening, USW…..interesting article. I might add, since you used Texas as an example, that every two years, Texas always has a budget shortfall (our wish list) but there is no deficit spending. The State Constitution requires a balanced budget and Texxas will balance its budget as it always does.

The Texas State Legislature passed and Gov. Rick Perry signed on June 19, 2009 a 2-year budget (Sept.1, 2009 to Aug. 31, 2011) with a projected $9 billion Rainy Day Fund. The FY 2010-2011 biennium budget of $182.3 billion spends $1.6 billion less in general revenue than the previous biennium. Gov. Perry congratulated the Legislature for passing the budget saying, “The Legislature has done a commendable job in reducing the general revenue appropriation to live within the Comptroller’s revenue estimate issued in January,” and only used his line-item veto (YES SIR. TEXAS HAS THE LINE ITEM VETO) power to cut $97.2 million in general revenue and $288.9 million from all funding sources.

Gov. Perry pointed out, “In light of the economic downturn affecting the nation, this session we continued to make wise choices, such as cutting taxes on 40,000 small businesses and maintaining a multi-billion dollar balance in our Rainy Day Fund that have helped our state sustain its overall economic strength. These prudent and fiscally conservative decisions continue to pay off for our taxpayers.

The Texas state budget is implemented for two year durations by the Legislative Budget Board. Agencies develop their appropriations requests in the first year, the legislature approves the General Appropriations Act in the second year, and the budget is implemented over the next two years. By constitutional mandate, Texas operates under budgets set for two-year periods.

Texas’ fiscal period runs from September 1st to the following August 31st of an odd-numbered year (for example, September 1, 2009 – August 31, 2011. Since 1978, the state constitution has required the State Comptroller to create an itemized estimate of the incoming revenue that will be available to the state for spending in the upcoming two-year fiscal period (biennium). This estimate is submitted to the Governor and the legislature and is used as a baseline to ensure that appropriations do not exceed incoming revenue. Once an appropriation bill is agreed on by both houses of the legislature, it is sent to the State Comptroller for certification that there will be sufficient incoming revenue to cover the bill’s appropriations. If the Comptroller concludes that there is not enough money to cover the proposed spending, the bill is sent back to the legislature where any spending in excess of anticipated revenue must be approved by a 4/5 vote in each house.

Once a bill is certified by the Comptroller, the bill is sent to the Governor for review and signature; the state constitution grants the Governor a line-item veto by which he can use to cancel out specific provisions without having to veto the bill in its entirety.

The regular legislative sessions begin the second Tuesday in January every odd-numbered year and convene for not more than 140 days. The governor may call the legislature into special session as deemed appropriate. Special sessions are limited to issues specifically stated in the governor’s call and may meet up to the 30-day maximum.

The Governor submits a recommended budget the 30th day of the regular legislative session. The Legislative Budget Office is responsible for fiscal notes, not the Executive Budget Office. Legislative Budget Board (the legislature’s budget agency) coordinates statewide performance measures and compiles reports.

The state does have a constitutional cap on spending, using the growth of the state’s economy, which is determined by the Legislative Budget Board (run by the Gov, Lt Gov, Speaker and Comptroller).

USW…this is not fool proof by any means and we have to make specific cuts that “progressive” states deem improper. Below is an example of our budget percentages..

There are a lot of us that do not like the spending on education due to the illegal population that is requiring that over one half of that 44.4% of the budget is spent on that. we are introducing legislation this year to not fund any education that is not a citizen. Don’t know if it will pass or not. We are going to take this on as a State and do not really give a tinker’s damn about the Feds and their threats they have made.

Note that health and human resources are only one third of our budget whereas most states are over 50%.
Note that only 2.4% of our budget is on State government. We do not have professional politicians.
Note that we only allocate less than 2% to natural resources as Texas recognizes and practices with great precision the protection of our natural resources….and that includes water which is more guarded than our oil and natural gas.

Anyway, we are faced with a significant budget (wish list) shortfall in two years and are deciding how to handle this and it will be with cuts in services..hopefully the illegal immigrant expenditures.

Hope this helps a little as the report that you offered did not take in the requirement to balance the budget…only that Texas faces a “budget” shortfall in two years.

As your and JAC’s request……I cannot believe you do not know what a Jagurundi is…I thought everybody had those.

USW…just jacking with you on the Jagurundi….it is a South Texas Rock Badger (Our name for it). It lives primarily in rock quarries and in the rocks of the dams that are built on ranches. It is confined primarily to South and Southwest Texas. Note the stubby legs on it that are made for digging and fighting. It bites. That pic you sent..tho…it is on steroids. Biggest one I have ever seen.

We also have a new cross breed hyena that was introduced in South and Southwest Texas to help with the rodents (rabbits, especially) and it was thought that they would not breed very much….it turns out they have been prolific and now are being destroyed because they prey on cattle and sheep.

I might add that the introduction was back in the 80’s….by the Feds….sheesh.

Well the Chinese get California which will be good riddance I think. perhaps they should get Oregon and Washington too in the foreclosure sale. One very, very important thing. The adjacent states must build walls to protect themselves BEFORE the Chinese take over. Nobody should ever let the people who caused the problems flee from what they have created so that they can do it again. That’s our problem in New Jersey, the NY liberals who couldn’t take the city anymore, moved out here 20 years ago and tried again. They will never get it. Like those French WW I generals, not the machine guns but the lack of elan that prevented the advances. Libs are the same, not that it failed but that they were not serious enough. Bastards.